UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transaction period from __________ to __________ Commission File Number: 0-22140 FIRST MIDWEST FINANCIAL, INC. ----------------------------- (Exact name of registrant as specified in its charter) Delaware 42-1406262 -------- ---------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) Fifth at Erie, Storm Lake, Iowa 50588 ------------------------------------- (Address of principal executive offices) (712) 732-4117 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class: Outstanding at May 11, 2001: Common Stock, $.01 par value 2,429,727 Common Shares Transitional Small Business Disclosure Format: Yes ____; No X
FIRST MIDWEST FINANCIAL, INC. FORM 10-Q INDEX <TABLE> <CAPTION> Page No. -------- Part I. Financial Information - ------------------------------- <S> <C> <C> Item 1. Financial Statements (unaudited): Consolidated Balance Sheets at March 31, 2001 and September 30, 2000 3 Consolidated Statements of Income for the Three Months and Six Months Ended March 31, 2001 and 2000 4 Consolidated Statements of Comprehensive Income (Loss) for the Three Months and Six Months Ended March 31, 2001 and 2000 5 Consolidated Statement of Changes in Shareholders' Equity for the Six Months Ended March 31, 2001 6 Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2001 and 2000 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosure About Market Risk 17 Part II. Other Information 19 - --------------------------- Signatures 20 ---------- </TABLE>
Part I. Financial Information Item I. Financial Statements FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) <TABLE> <CAPTION> March 31, 2001 September 30, 2000 -------------- ------------------ Assets <S> <C> <C> Cash and due from banks $ 906,045 $ 984,937 Interest-bearing deposits in other financial institutions - short-term (cost approximates market value) 15,610,614 5,937,594 ------------- ------------- Total cash and cash equivalents 16,516,659 6,922,531 Securities available for sale, amortized cost of $146,128,897 at March 31, 2001 and $151,547,919 at September 30, 2000 145,500,450 147,478,931 Loans receivable - net of allowance for loan losses of $3,745,553 at March 31, 2001 and $3,589,873 at September 30, 2000 323,046,106 324,702,629 Foreclosed real estate, net 60,305 445,133 Accrued interest receivable 4,210,126 5,216,929 Federal Home Loan Bank stock, at cost 8,327,600 8,327,600 Premises and equipment, net 7,526,530 6,091,741 Excess of cost over net assets acquired 3,585,485 3,767,950 Other assets 1,033,532 2,636,986 ------------- ------------- Total Assets $ 509,806,793 $ 505,590,430 ============= ============= Liabilities and Shareholders' Equity Liabilities Deposits $ 339,655,672 $ 318,653,721 Advances from Federal Home Loan Bank 121,859,932 139,738,451 Securities sold under agreements to repurchase 3,199,906 4,254,965 Advances from borrowers for taxes and insurance 482,218 461,514 Accrued interest payable 1,211,784 1,006,341 Other liabilities 1,182,158 1,440,353 ------------- ------------- Total Liabilities 467,591,670 465,555,345 ------------- ------------- Shareholders' Equity Preferred stock, 800,000 shares authorized, no shares issued or outstanding -- -- Common stock, $.01 par value, 5,200,000 shares authorized, 2,957,999 shares issued and 2,429,727 shares outstanding at March 31, 2001; 2,957,999 shares issued and 2,431,574 shares outstanding at September 30, 2000 29,580 29,580 Additional paid-in capital 20,976,107 20,976,107 Retained earnings - substantially restricted 30,801,464 30,404,386 Accumulated other comprehensive income (loss) (393,153) (2,553,891) Unearned Employee Stock Ownership Plan shares (360,000) -- Treasury stock, 528,272 and 526,425 common shares, at cost, at March 31, 2001 and September 30, 2000, respectively (8,838,875) (8,821,097) ------------- ------------- Total Shareholders' Equity 42,215,123 40,035,085 ------------- ------------- Total Liabilities and Shareholders' Equity $ 509,806,793 $ 505,590,430 ============= ============= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 3
FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended March 31, March 31, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Interest and Dividend Income: <S> <C> <C> <C> <C> Loans receivable $ 6,705,397 $ 6,433,856 $ 13,737,836 $ 12,703,915 Securities available for sale 2,634,911 2,977,174 5,287,452 5,980,999 Dividends on Federal Home Loan Bank stock 117,569 133,998 265,773 264,884 ------------ ------------ ------------ ------------ Total interest and dividend income 9,457,877 9,545,028 19,291,061 18,949,798 Interest Expense: Deposits 4,496,363 3,781,058 9,016,538 7,510,580 FHLB advances and other borrowings 1,852,656 2,210,759 3,877,533 4,392,714 ------------ ------------ ------------ ------------ Total interest expense 6,349,019 5,991,817 12,894,071 11,903,294 ------------ ------------ ------------ ------------ Net interest income 3,108,858 3,553,211 6,396,990 7,046,504 Provision for loan losses 120,000 270,000 270,000 595,000 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 2,988,858 3,283,211 6,126,990 6,451,504 Noninterest income: Loan fees and deposit service charges 316,180 269,710 592,702 580,327 Gain (loss) on sales of securities available for sale, net (131,250) (5,000) (131,250) (5,000) Gain (loss) on sales of foreclosed real estate, net 7,132 (17,322) 6,675 (13,890) Brokerage commissions 15,041 32,808 42,904 69,668 Other income 16,951 35,963 49,779 98,237 ------------ ------------ ------------ ------------ Total noninterest income 224,054 316,159 560,810 729,342 Noninterest expense: Employee compensation and benefits 1,651,614 1,459,504 3,202,187 2,833,800 Occupancy and equipment expense 377,860 328,147 724,632 625,296 Federal deposit insurance premium 15,755 18,284 31,719 57,276 Data processing expense 117,552 113,957 206,273 214,234 Other expense 553,091 455,036 1,027,080 927,535 ------------ ------------ ------------ ------------ Total noninterest expense 2,715,872 2,374,928 5,191,891 4,658,141 ------------ ------------ ------------ ------------ Income before income taxes 497,040 1,224,442 1,495,909 2,522,705 Income tax expense 87,913 463,695 480,476 997,278 ------------ ------------ ------------ ------------ Net income $ 409,127 $ 760,747 $ 1,015,433 $ 1,525,427 ============ ============ ============ ============ Earnings per common share: Basic $ 0.17 $ 0.31 $ 0.42 $ 0.62 ------------ ------------ ------------ ------------ Diluted $ 0.17 $ 0.30 $ 0.41 $ 0.60 ------------ ------------ ------------ ------------ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 4
FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Loss) (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended March 31, March 31, 2001 2000 2001 2000 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Net income $ 409,127 $ 760,747 $ 1,015,433 $ 1,525,427 Other comprehensive income (loss): Net change in net unrealized gains and losses on securities available for sale 1,681,372 (31,413) 3,440,541 (3,182,745) Deferred income tax expense (benefit) 625,170 (11,717) 1,279,803 (1,183,699) ----------- ----------- ----------- ----------- Total other comprehensive income (loss) 1,056,202 (19,696) 2,160,738 (1,999,046) ----------- ----------- ----------- ----------- Total comprehensive income (loss) $ 1,465,329 $ 741,051 $ 3,176,171 $ (473,619) =========== =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements. </TABLE> 5
FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Shareholders' Equity (Unaudited) For the Six Months Ended March 31, 2001 <TABLE> <CAPTION> Accumulated Other Additional Comprehensive Common Paid-In Retained Income (Loss), Stock Capital Earnings Net of Tax -------------- ------------- ------------- -------------- <S> <C> <C> <C> <C> Balance at September 30, 2000 $ 29,580 $ 20,976,107 $ 30,404,386 $ (2,553,891) Purchase of 30,000 shares by ESOP - - - - Cash dividends declared on common stock ($0.26 per share) - - (618,355) - Purchase of 1,847 common shares of treasury stock - - - - Net change in net unrealized losses on securities available for sale, net of effect of income taxes of $1,279,803 - - - 2,160,738 Net income for the six months ended March 31, 2001 - - 1,015,433 - ---------------- --------------- --------------- ---------------- Balance at March 31, 2001 $ 29,580 $ 20,976,107 $ 30,801,464 $ (393,153) ================ =============== =============== ================ <CAPTION> Unearned Employee Stock Ownership Total Plan Treasury Shareholders' Shares Stock Equity -------------- ------------- ------------- <S> <C> <C> <C> Balance at September 30, 2000 $ - $ (8,821,097) $ 40,035,085 Purchase of 30,000 shares by ESOP (360,000) - (360,000) Cash dividends declared on common stock ($0.26 per share) - - (618,355) Purchase of 1,847 common shares of treasury stock - (17,778) (17,778) Net change in net unrealized losses on securities available for sale, net of effect of income taxes of $1,279,803 - - 2,160,738 Net income for the six months ended March 31, 2001 - - 1,015,433 ---------------- --------------- --------------- Balance at March 31, 2001 $ (360,000) $ (8,838,875) $ 42,215,123 ================ =============== =============== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 6
FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> Six Months Ended March 31, 2001 2000 ------------- ------------- Cash flows from operating activities: <S> <C> <C> Net income $ 1,015,433 $ 1,525,427 Adjustments to reconcile net income to net cash from operating activities: Depreciation, amoritization and accretion, net 496,967 858,989 Provision for loan losses 270,000 595,000 (Gain) loss on sales of securities available for sale, net 131,250 5,000 (Gain) loss on sales of foreclosed real estate, net (6,675) 13,890 Proceeds from sales of loans held for sale 4,957,253 504,567 Originations of loans held for sale (4,957,253) (504,567) Net change in accrued interest receivable 1,006,803 1,113,458 Net change in other assets 322,978 (103,172) Net change in accrued interest payable 205,443 114,630 Net change in accrued expenses and other liabilities (258,195) 135,562 ------------- ------------- Net cash from operating activities 3,184,004 4,258,784 Cash flows from investing activities: Purchase of securities available for sale -- (515,000) Purchase of Federal Home Loan Bank stock -- (42,500) Proceeds from sales of securities available for sale -- 495,000 Proceeds from maturities and principal repayments of securities available for sale 5,175,181 5,191,969 Net change in loans receivable 9,479,973 21,968,151 Loans purchased (8,061,895) (28,598,055) Proceeds from sales of foreclosed real estate 425,503 277,676 Purchase of shares by ESOP (360,000) -- Purchase of premises and equipment, net (1,701,581) (1,197,900) ------------- ------------- Net cash from investing activities 4,957,181 (2,420,659) Cash flows from financing activities: Net change in noninterest-bearing demand, savings, NOW, and money market demand deposits 5,113,763 1,026,441 Net change in other time deposits 15,888,188 7,419,450 Proceeds from advances from Federal Home Loan Bank 51,265,000 404,800,000 Repayments of advances from Federal Home Loan Bank (69,143,520) (413,665,366) Net change in securities sold under agreements to repurchase (1,055,059) (58,738) Net change in advances from borrowers for taxes and insurance 20,704 56,906 Cash dividends paid (618,355) (645,326) Proceeds from the exercise of stock options -- 363,335 Purchase of treasury stock (17,778) (1,478,507) ------------- ------------- Net cash from financing activities 1,452,943 (2,181,805) ------------- ------------- Net change in cash and cash equivalents 9,594,128 (343,680) Cash and cash equivalents at beginning of period 6,922,531 5,373,911 ------------- ------------- Cash and cash equivalents at end of period $ 16,516,659 $ 5,030,231 ============= ============= Supplemental disclosure of cash flow information Cash paid during the period for: Interest $ 12,668,628 $ 11,788,664 Income taxes 446,266 945,904 Supplemental schedule of non-cash investing and financing activities: Loans transferred to foreclosed real estate $ 34,000 $ 766,935 </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 7
FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies followed by First Midwest Financial, Inc. ("First Midwest" or the "Company") and its consolidated subsidiaries, First Federal Savings Bank of the Midwest ("First Federal"), Security State Bank ("Security"), First Services Financial Limited and Brookings Service Corporation, for interim reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments that, in the opinion of management, are necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements, and all such adjustments are of a normal recurring nature. The accompanying financial statements do not purport to contain all the necessary financial disclosures required by generally accepted accounting principles that might otherwise be necessary in the circumstances and should be read in conjunction with the Company's consolidated financial statements, and notes thereto, for the year ended September 30, 2000. 2. EARNINGS PER SHARE Basic earnings per share is based on net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share shows the dilutive effect of additional common shares issuable under stock options. A reconciliation of the numerators and denominators used in the basic earnings per common share and the diluted earnings per common share computations for the three months and six months ended March 31, 2001 and 2000 is presented below. <TABLE> <CAPTION> Three Months Ended Six Months Ended March 31, March 31, --------- --------- 2001 2000 2001 2000 ---- ---- ---- ---- Basic Earnings Per Common Share: <S> <C> <C> <C> <C> Numerator: Net Income $ 409,127 $ 760,747 $ 1,015,433 $ 1,525,427 =========== =========== =========== =========== Denominator: Weighted average common shares outstanding 2,429,727 2,482,787 2,429,727 2,498,084 Less: Weighted average unallocated ESOP shares (3,333) (15,080) (1,648) (18,851) ----------- ----------- ----------- ----------- Weighted average common shares outstanding for basic earnings per share 2,426,394 2,467,707 2,428,079 2,479,233 =========== =========== =========== =========== Basic earnings per common share $ 0.17 $ 0.31 $ 0.42 $ 0.62 =========== =========== =========== =========== </TABLE> 8
<TABLE> <CAPTION> Three Months Ended Six Months Ended March 31, March 31, --------- --------- 2001 2000 2001 2000 ---- ---- ---- ---- Diluted Earnings Per Common Share: <S> <C> <C> <C> <C> Numerator: Net Income $ 409,127 $ 760,747 $1,015,433 $1,525,427 ========== ========== ========== ========== Denominator: Weighted average common shares outstanding for basic earnings per common share 2,426,394 2,467,707 2,428,079 2,479,233 Add: Dilutive effects of assumed exercises of stock options and nonvested MRRP shares, net of tax benefits 45,672 42,710 38,825 52,633 ---------- ---------- ---------- ---------- Weighted average common and dilutive potential common shares outstanding 2,472,066 2,510,417 2,466,904 2,531,866 ========== ========== ========== ========== Diluted earnings per common share $ 0.17 $ 0.30 $ 0.41 $ 0.60 ========== ========== ========== ========== </TABLE> 3. COMMITMENTS At March 31, 2001 and September 30, 2000, the Company had outstanding commitments to originate and purchase loans totaling $12.0 million and $14.8 million, respectively, excluding undisbursed portions of loans in process. It is expected that outstanding loan commitments will be funded with existing liquid assets. 9
Part I. Financial Information Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES GENERAL First Midwest Financial, Inc. ("First Midwest" or the "Company") is a bank holding company whose primary assets are First Federal Savings Bank of the Midwest ("First Federal") and Security State Bank ("Security"). The Company was incorporated in 1993 as a unitary non-diversified savings and loan holding company and, on September 20, 1993, acquired all of the capital stock of First Federal in connection with First Federal's conversion from mutual to stock form of ownership. On September 30, 1996, the Company became a bank holding company in conjunction with the acquisition of Security. The following discussion focuses on the consolidated financial condition of the Company and its subsidiaries, at March 31, 2001, compared to September 30, 2000, and the consolidated results of operations for the three months and six months ended March 31, 2001, compared to the same periods in 2000. This discussion should be read in conjunction with the Company's consolidated financial statements, and notes thereto, for the year ended September 30, 2000. FINANCIAL CONDITION Total assets increased by $4.2 million, or 0.83%, to $509.8 million at March 31, 2001, from $505.6 million at September 30, 2000. Cash and cash equivalents increased $9.6 million, or 139.1%, to $16.5 million at March 31, 2001, from $6.9 million at September 30, 2000. The increase was primarily due to the accumulation of liquid funds resulting from retail deposit growth and repayments on loans receivable and mortgage-backed securities during the period. These funds are held in interest-bearing accounts and will be used to fund anticipated loan growth. The portfolio of securities available for sale decreased $2.0 million, or 1.4%, to $145.5 million at March 31, 2001, from $147.5 million at September 30, 2000. The decrease resulted from maturities and principal repayments received during the period, which was partially offset by an adjustment to increase the carrying value of securities available for sale to market value in accordance with SFAS 115. The portfolio of net loans receivable decreased by $1.7 million, or .52%, to $323.0 million at March 31, 2001, from $324.7 million at September 30, 2000. The decrease was due primarily to a seasonal decline in agricultural-related loans, which declined approximately $2.5 million during the period. Deposit balances increased by $21.0 million, or 6.6%, to $339.7 million at March 31, 2001, from $318.7 million at September 30, 2000. The increase in deposit balances resulted from increases in checking accounts, money market demand accounts, and certificates of deposit in the amounts of $1.5 million, $4.7 million, and $15.9 million, respectively. These increases were partially offset by a $1.1 million decrease in savings accounts. The balance in advances from the Federal Home Loan Bank of Des Moines decreased by $17.8 million, or 12.7%, to $121.9 million at March 31, 2001, from $139.7 million at September 30, 2000. The decrease in FHLB advances resulted primarily from repayments using funds generated by retail deposit growth during the period. 10
Total shareholders' equity increased $2.2 million, or 5.5%, to $42.2 million at March 31, 2001, from $40.0 million at September 30, 2000. The increase in shareholders' equity was due to earnings during the period in excess of dividends paid to shareholders and to a decrease in the unrealized loss on securities available for sale in accordance with SFAS 115. NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES Generally, when a loan becomes delinquent 90 days or more, or when the collection of principal or interest becomes doubtful, the Company will place the loan on non-accrual status and, as a result of this action, previously accrued interest income on the loan is taken out of current income. The loan will remain on non-accrual status until the loan has been brought current, or until other circumstances occur that provide adequate assurance of full repayment of interest and principal. At March 31, 2001, the Company had loans delinquent 30 days and over totaling $9.4 million, or 2.9% of total loans compared to $2.3 million, or .71% of total loans at September 30, 2000. At March 31, 2001, commercial and multi-family real estate loans delinquent 30 days and over totaled $4.6 million, or 1.4% of the total loan portfolio as compared to $674,000, or 0.21% of total loans at September 30, 2000. Multi-family and commercial real estate loans generally present a higher level of risk than loans secured by one- to four-family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. The majority of the Company's delinquent commercial and multi-family real estate loans have been purchased as participations with other lenders, are serviced by other lenders and are secured by properties outside the Company's primary market area. These loans are being closely monitored by management, however, there can be no assurance that all loans will be fully collectible. At March 31, 2001, agricultural operating loans delinquent 30 days and over totaled $2.9 million, or 0.89% of the total loan portfolio as compared to $451,000, or 0.14% of total loans at September 30, 2000. Agricultural lending involves a greater degree of risk than one- to four-family residential mortgage loans because of the typically larger loan amounts. In addition, payments on loans are dependent on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. The success of the loan may also be affected by factors outside the control of the agricultural borrower, such as the weather and grain and livestock prices. Although management believes the Company's portfolio of agricultural real estate and operating loans is well structured and adequately secured, there can be no assurance that all loans will be fully collectible. 11
The table below sets forth the amounts and categories of non-performing assets in the Company's loan portfolio. The Company's restructured loans (which involved forgiving a portion of the interest or principal on the loan or making loans at a rate materially less than market rates) are included in the table and were performing as agreed at the date shown. Foreclosed assets include assets acquired in settlement of loans. <TABLE> <CAPTION> March 31, 2001 September 30, 2000 -------------- ------------------ (Dollars in Thousands) Non-accruing loans: <S> <C> <C> One-to four family $ 131 $ 206 Commercial and multi-family 916 -- Agricultural real estate -- 37 Consumer 45 -- Agricultural operating 844 17 Commercial business 310 51 ------ ------ Total non-accruing loans 2,246 311 Accruing loans delinquent 90 days or more -- -- ------ ------ Total non-performing loans 2,246 311 ------ ------ Restructured loans: Agricultural operating 916 918 Commercial business 183 43 ------ ------ Total restructured loans 1,099 961 ------ ------ Foreclosed assets: Commercial real estate 60 430 Consumer -- 15 ------ ------ Total foreclosed assets 60 445 Less: Allowance for losses -- -- ------ ------ Total foreclosed assets, net 60 445 ------ ------ Total non-performing assets $3,405 $1,717 ====== ====== Total non-performing loans as a percentage of total loans 0.69% 0.09% ====== ====== Total non-performing assets as a percentage of total assets 0.67% 0.34% ====== ====== </TABLE> Non-accruing loans at March 31, 2001 include a commercial real estate loan in the amount of $889,000 secured by a nursing home, an agricultural operating loan in the amount of $775,000 secured by livestock and land, and a commercial business loan in the amount of $310,000 secured by two car wash facilities. Management feels the underlying collateral is adequate to protect the Company against material loss on these loans. Classified Assets. Federal regulations provide for the classification of loans and other assets as "substandard", "doubtful" or "loss", based on the level of weakness determined to be inherent in the collection of the principal and interest. When loans are classified as either substandard or doubtful, the Company may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem loans. When assets are classified as loss, the Company is required either to establish a specific allowance for loan losses equal to 100% of that portion of the loan so classified, or to charge-off such amount. The Company's determination as to the classification of its loans and the amount of its valuation 12
allowances are subject to review by its regulatory authorities, whom may require the establishment of additional general or specific loss allowances. On the basis of management's review of its loans and other assets, at March 31, 2001, the Company had classified a total of $5.5 million of its assets as substandard, $170,000 as doubtful and none as loss as compared to classifications at September 30, 2000 of $6.1 million substandard, $135,000 doubtful and none as loss. Allowance for Loan Losses. The Company establishes its provision for loan losses, and evaluates the adequacy of its allowance for loan losses based upon a systematic methodology consisting of a number of factors including, among others, historic loss experience, the overall level of non-performing loans, the composition of its loan portfolio and the general economic environment within which the Bank and its borrowers operate. Current economic conditions in the agricultural sector of the Company's market area indicate potential weakness due to uncertain growing conditions for the 2001 growing season and to historically low commodity prices. Although growing conditions appear to be favorable for the 2001 growing season, near drought conditions last year in a limited portion of the Company's agricultural market area have the potential to reduce crop yields for these areas. Price levels for grain crops have generally been depressed since mid-1998 and currently remain at historically low levels. Grain crop prices are not expected to increase significantly in the near term. Livestock prices have improved and are currently at levels that present minimal concern. The agricultural economy is accustomed to commodity price fluctuations and is generally able to handle such fluctuations without significant problem. Although the Company underwrites its agricultural loans based on the current level of commodity prices, an extended period of low commodity prices or adverse growing conditions could result in weakness in the agricultural loan portfolio and could create a need for the Company to increase its allowance for loan losses through increased charges to the provision for loan losses. At March 31, 2001, the Company has established an allowance for loan losses totaling $3.7 million. The allowance represents approximately 1.7 times the total non-performing loans at March 31, 2001 compared to approximately 11.6 times the total non-performing loans at September 30, 2000. The following table sets forth an analysis of the activity in the Company's allowance for loan losses: (In Thousands) Balance, September 30, 2000 $ 3,590 Charge-offs (145) Recoveries 31 Additions charged to operations 270 ------- Balance, March 31, 2001 $ 3,746 ======= Based on currently available information, management believes the allowance for loan losses is adequate to absorb currently anticipated losses in the portfolio. Future additions to the allowance for loan losses may become necessary based upon changing economic conditions, increased loan balances or changes in the underlying collateral of the loan portfolio. 13
RESULTS OF OPERATIONS General. For the three months ended March 31, 2001, the Company recorded net income of $409,000 compared to net income of $761,000 for the same period in 2000. For the six months ended March 31, 2001, net income was $1,015,000 compared to $1,525,000 for the same period in 2000. The decline in net income in both periods was the result of a reduction in net interest income due to a narrowing of net interest margins. In addition, net income was reduced due to increased noninterest expense resulting from start-up costs associated with the opening of a new office and costs associated with a data processing conversion at the Company's Security State Bank subsidiary. Net Interest Income. Net interest income decreased by $444,000, or 12.5%, to $3,109,000 for the three months ended March 31, 2001 from $3,553,000 for the same period in 2000. For the six months ended March 31, 2001, net interest income decreased $650,000, or 9.2%, to $6,397,000 from $7,047,000 for the same period in 2000. The decline in net interest income reflects a reduction in net yield on average interest-earning assets between the comparable periods. The net yield on average interest-earning assets for the six months ended March 31, 2001 was 2.60% compared to 2.85% for the comparable period in 2000. The decline in net interest income also reflects a reduction in average interest-earning assets during the three-month and six-month periods ended March 31, 2001 compared to the same periods in 2000. Provision for Loan Losses. For the three months ended March 31, 2001, the provision for loan losses was $120,000 compared to $270,000 for the same period in 2000. For the six months ended March 31, 2001, the provision for loan losses was $270,000 compared to $595,000 for the same period in 2000. Management believes that, based on a detail review of the loan portfolio, historic loan losses, current economic conditions, and other factors, the current level of provision for loan losses, and the resulting level of the allowance for loan losses, reflects an adequate allowance against currently anticipated losses from the loan portfolio. Noninterest Income. Noninterest income decreased $92,000, 29.1%, to $224,000 for the three months ended March 31, 2001 from $316,000 for the same period in 2000. For the six months ended March 31, 2001, noninterest income decreased $168,000, or 23.0%, to $561,000 from $729,000 for the same period in 2000. The decrease for both periods was due primarily to the write-down in carrying value of an investment security as a result of a permanent decline in its market value. Noninterest Expense. Noninterest expense increased $341,000, or 14.4%, to $2,716,000 for the three months ended March 31, 2001, from $2,375,000 for the same period in 2000. For the six months ended March 31, 2001, noninterest expense increased $534,000, or 11.5%, to $5,192,000 from $4,658,000 for the same period in 2000. The increase for both periods reflects the costs associated with opening a new office in Sioux Falls, South Dakota, which opened in a temporary facility in September 2000. Construction of a permanent facility was completed on schedule, and the move to the new office was made in April 2001. Noninterest expense was also increased due to costs associated with a data processing conversion at the Company's Security State Bank subsidiary. This conversion will provide on-going efficiencies as a consistent data processing system is now in use throughout the Company. In addition, increased occupancy and equipment expense reflects the Company's on-going effort to enhance its technology systems for the efficient delivery of products and customer service. Income Tax Expense. Income tax expense was $88,000 for the three months ended March 31, 2001 compared to $464,000 for the same period in 2000. For the six months ended March 31, 2001, income tax expense was $480,000 compared to $997,000 for the same period in 2000. The decrease for both periods reflects the decrease in the level of taxable income between the comparable periods. In addition, the decrease in income tax expense reflects the resolution of a tax contingency in the net amount of $117,000. 14
LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds are deposits, borrowings, principal and interest payments on loans, investments and mortgage-backed securities, and funds provided by operations. While scheduled payments on loans, mortgage-backed securities and short-term investments are relatively predictable sources of funds, deposit flows and early loan repayments are greatly influenced by general interest rates, economic conditions and competition. The Company uses its capital resources principally to meet ongoing commitments to fund maturing certificates of deposits and loan commitments, to maintain liquidity, and to meet operating expenses. At March 31, 2001, the Company had commitments to originate and purchase loans totaling $12.0 million. The Company believes that loan repayment and other sources of funds will be adequate to meet its foreseeable short- and long-term liquidity needs. On April 4, 2001, the Company entered into an agreement to purchase an existing building located at 3401 Ingersoll Avenue, Des Moines, Iowa. The building will be used as an additional branch office facility, which is scheduled to open for business in November 2001. The source of funds for capital improvements of this type is from the normal operations of the Company. Regulations require First Federal and Security to maintain minimum amounts and ratios of total risk-based capital and Tier 1 capital to risk-weighted assets, and a leverage ratio consisting of Tier 1 capital to average assets. The following table sets forth First Federal's and Security's actual capital and required capital amounts and ratios at March 31, 2001 which, at that date, exceeded the capital adequacy requirements: <TABLE> <CAPTION> Minimum Requirement To Be Well Minimum Requirement Capitalized Under For Capital Adequacy Prompt Corrective Actual Purposes Action Provisions ------ -------- ----------------- At March 31, 2001 Amount Ratio Amount Ratio Amount Ratio - ----------------- ------ ----- ------ ----- ------ ----- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> Total Capital (to risk weighted assets): First Federal $35,515 11.8% $24,102 8.0% $30,128 10.0% Security 4,313 15.1 2,288 8.0 2,860 10.0 Tier 1 (Core) Capital (to risk weighted assets): First Federal 32,004 10.6 12,051 4.0 18,077 6.0 Security 3,991 14.0 1,144 4.0 1,716 6.0 Tier 1 (Core) Capital (to adjusted total assets): First Federal 32,004 6.9 18,427 4.0 23,034 5.0 Security 3,991 9.0 1,779 4.0 2,224 5.0 Tier 1 (Core) Capital (to average assets): First Federal 32,004 7.0 18,350 4.0 22,937 5.0 </TABLE> The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) established five regulatory capital categories and authorized the banking regulators to take prompt corrective action with respect to institutions in an undercapitalized category. At March 31, 2001, First Federal and Security exceeded minimum requirements for the well-capitalized category. 15
Forward-Looking Statements The Company, and its wholly-owned subsidiaries, First Federal and Security, may from time to time make written or oral "forward-looking statements," including statements contained in its filings with the Securities and Exchange Commission, in its reports to shareholders, and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to the Company's beliefs, expectations, estimates, and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond the Company's control. Such statements address the following subjects: future operating results; customer growth and retention; loan and other product demand; earnings growth and expectations; new products and services; credit quality and adequacy of reserves; technology; and our employees. The following factors, among others, could cause the Company's financial performance to differ materially from the expectations, estimates, and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Federal Reserve Board; inflation, interest rate, market, and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users; the impact of changes in financial services' laws and regulations; technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing. The foregoing list of factors is not exclusive. Additional discussion of factors affecting the Company's business and prospects is contained in the Company's periodic filings with the SEC. The Company does not undertake, and expressly disclaims any intent or obligation, to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company. 16
Part I. Financial Information Item 3. Quantitative and Qualitative Disclosure About Market Risk Market Risk The Company is exposed to the impact of interest rate changes and changes in the market value of its investments. The Company currently focuses lending efforts toward originating and purchasing competitively priced adjustable-rate loan products and fixed-rate loan products with relatively short terms to maturity. This allows the Company to maintain a portfolio of loans that will be sensitive to changes in the level of interest rates while providing a reasonable spread to the cost of liabilities used to fund the loans. The Company's primary objective for its investment portfolio is to provide the liquidity necessary to meet loan funding needs. This portfolio is used in the ongoing management of changes to the Company's asset/liability mix, while contributing to profitability through earnings flow. The investment policy generally calls for funds to be invested among various categories of security types and maturities based upon the Company's need for liquidity, desire to achieve a proper balance between minimizing risk while maximizing yield, the need to provide collateral for borrowings, and to fulfill the Company's asset/liability management goals. The Company's cost of funds responds to changes in interest rates due to the relatively short-term nature of its deposit portfolio. Consequently, the results of operations are generally influenced by the level of short-term interest rates. The Company offers a range of maturities on its deposit products at competitive rates and monitors the maturities on an ongoing basis. The Company emphasizes and promotes its savings, money market, demand and NOW accounts and, subject to market conditions, certificates of deposit with maturities of six months through five years, principally from its primary market area. The savings and NOW accounts tend to be less susceptible to rapid changes in interest rates. In managing its asset/liability mix, the Company, at times, depending on the relationship between long- and short-term interest rates, market conditions and consumer preference, may place somewhat greater emphasis on maximizing its net interest margin than on strictly matching the interest rate sensitivity of its assets and liabilities. Management believes that the increased net income which may result from an acceptable mismatch in the actual maturity or repricing of its asset and liability portfolios can, during periods of declining or stable interest rates, provide sufficient returns to justify the increased exposure to sudden and unexpected increases in interest rates which may result from such a mismatch. The Company has established limits, which may change from time to time, on the level of acceptable interest rate risk. There can be no assurance, however, that in the event of an adverse change in interest rates the Company's efforts to limit interest rate risk will be successful. Net Portfolio Value The Company uses a Net Portfolio Value ("NPV") approach to the quantification of interest rate risk. This approach calculates the difference between the present value of expected cash flows from assets and the present value of expected cash flows from liabilities, as well as cash flows from off-balance-sheet contracts. Management of the Company's assets and liabilities is performed within the context of the marketplace, but also within limits established by the Board of Directors on the amount of change in NPV that is acceptable given certain interest rate changes. 17
Presented below, as of March 31, 2001 and September 30, 2000, is an analysis of the Company's interest rate risk as measured by changes in NPV for an instantaneous and sustained parallel shift in the yield curve, in 100 basis point increments, up and down 200 basis points. As illustrated in the table, the Company's NPV at March 31, 2001 is somewhat more sensitive to decreasing interest rate changes than to increasing rates. This is a change from September 30, 2000, when the Company's NPV was more sensitive to increasing interest rates. The change reflects management's effort to modify the Company's interest rate sensitivity in light of a significant decline in interest rates during the past few months. With interest rates at historically low levels, management feels there is less risk from interest rates declining substantially from current levels than from the potential increase in interest rates. <TABLE> <CAPTION> Change in Interest Rates Board Limit At March 31, 2001 At September 30, 2000 (Basis Points) % Change $ Change % Change $ Change % Change -------------- -------- -------- -------- --------- -------- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> +200 bp (40)% $ (5,126) (13)% $ (7,202) (18)% +100 bp (25) (2,029) (5) (3,323) (8) 0 bp - - - - - -100 bp (10) (1,805) (5) 2,659 6 -200 bp (15) (6,937) (18) 1,657 4 </TABLE> Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets such as adjustable-rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayments and early withdrawal levels would likely deviate from those assumed in calculating the tables. Finally, the ability of some borrowers to service their debt may decrease in the event of an interest rate increase. The Company considers all of these factors in monitoring its exposure to interest rate risk. 18
FIRST MIDWEST FINANCIAL, INC. PART II - OTHER INFORMATION FORM 10-Q Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Shareholders on January 22, 2001. At the meeting, shareholders of the Company considered and voted upon the following matter: 1. The election of the following individuals as directors for a three-year term: E. Wayne Cooley J. Tyler Haahr The results of the election of directors are as follows: Votes ----- In Favor Withheld -------- -------- E. Wayne Cooley 2,096,294 83,079 J. Tyler Haahr 2,106,433 72,940 There were no broker non-votes or abstentions on this proposal. The following directors' terms of office continued after the meeting: E. Thurman Gaskill Rodney G. Muilenburg James S. Haahr G. Mark Mickelson Jeanne Partlow Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: First Midwest Financial, Inc. filed Form 8-K dated February 26, 2001 to report the issuance of a press release announcing the declaration of a regular cash dividend to shareholders and the authorization for the purchase of shares by the Trustee of the Company's Employee Stock Ownership Plan. All other items have been omitted as not required or not applicable under the instructions. 19
FIRST MIDWEST FINANCIAL, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST MIDWEST FINANCIAL, INC. Date: May 15, 2001 By: /s/ James S. Haahr ------------ ------------------------------------------ James S. Haahr, Chairman of the Board, President and Chief Executive Officer Date: May 15, 2001 By: /s/ Donald J. Winchell ------------ ------------------------------------------ Donald J. Winchell, Senior Vice President, Treasurer and Chief Financial Officer 20